Dovish Fed sees dollar dip under R11

File picture: Denis Farrell

File picture: Denis Farrell

Published Oct 10, 2014

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The rand rallied yesterday to trade briefly below R11 to the dollar for the first time since mid-September after the US Federal Reserve threw emerging markets a ray of sunshine.

The US central bank suggested in the minutes of its latest policy setting committee meeting that fragility of the global economy and a run-up in the dollar might deter the Fed from raising interest rates too soon following a spate of particularly strong US economic reports, including last Friday’s data showing employment picked up last month.

South African shares advanced the most in two months on the Fed news, led by shares of industrial and gold mining companies.

The FTSE/JSE Africa all share index gained 0.21 percent to close at 48 133.52. During the day it had its biggest intraday climb since mid-August, rising as much as 1.6 percent.

The latest Fed stance is the best news Reserve Bank governor-designate Lesetja Kganyago could have hoped for as he prepares to chair his first monetary policy committee (MPC) meeting next month.

Even Finance Minister Nhlanhla Nene might find some solace in the news as a recovery in the rand could take the pressure off him as he wrestles with a ballooning current account deficit.

The recovery should give Kganyago ample room to not raise interest rates, a move that might earn him some valuable stripes as the market and critics of the Reserve Bank prepare to decipher how he would conduct monetary policy in the face of anaemic growth and inflationary pressures.

He begins his term as governor on November 9, succeeding Gill Marcus.

The rand hit an intra-day high of R10.96 against the dollar, before retreating to be bid at R11.05 by 6pm.

Reserve Bank deputy governor Daniel Mminele said South African interest rates, which were negative once inflation was taken into account, would have to normalise over time.

In a speech in New York on Wednesday night, he said: “The persistence of negative short-term real interest rates is not desirable from a longer-term perspective, as they could exacerbate existing or generate new imbalances in the economy.

“Beyond the well-known impact that negative interest rates can have on the allocation of financial resources to different sectors of the economy [and] on the price of financial assets, it is also important to point out their impact on the attractiveness of savings, especially in a country like South Africa, where the low level of domestic savings remains a factor behind the elevated structural current account deficit.”

Mminele, a member of the MPC, was speaking at the second annual South Africa Tomorrow Conference, a gathering that informs investors about the country’s investment climate. He said these factors had led the Reserve Bank to embark on a gradual policy normalisation process, though one that remained data dependent.

He said while the Reserve Bank did not target a particular level or range of the exchange rate, “we are nonetheless mindful of the potential negative consequences of accelerated rand depreciation on the outlook for inflation, as well as broad measures of inflation expectations.”

However, analysts still expect a rate increase at the MPC meeting in November despite the recent appreciation of the rand, which they say will be short-lived.

Dawie Roodt, the chief economist at Efficient Group, said that the currency exchange moves yesterday were not a matter of the rand strengthening against the dollar but of the dollar retreating.

On the JSE, Harmony Gold shares jumped 7.58 percent to R23.55, while Gold Fields advanced 4.49 percent to R43.07 and AngloGold Ashanti gained 5.31 percent to R127.85.

Gold futures climbed to the highest level in more than two weeks in New York as the dollar weakened.

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